Legal Question in Business Law in California

Theorectically, an S corp will pass the tax liability through its shareholders. Since you left the corp by the end of 2009 and the tax was incurred during the year, you are responsible for half of the tax. But it is not that simple, the release form he signed released you from any obligations. It does not specify whether this includes the tax obligations for that year. It can be argued both ways. You may argue since you were released of any obligation that may arise, the tax obligation was also released. He may argue that the release was for any obligation that may occur in the future, e.g., to a client, but since by the time you left the tax obligation had already be occured, the release would not cover it. Although I incline to believe the release favors you, it is up in the air if a judge decides on this. It is a small amount of money anyway and I suppose you still want to keep a friend so that best way is to talk to him and negotiate a way that would work for both of you.

When you ceased to be a stockholder, you liability for taxes ceased. You will be liable for paying income tax on corporate profits, pro-rata, for any year in which you were a shareholder for part of the year. For example, if you sold out on November 30th, 2009, you'd be liable for taxes on (roughly) 11/12ths of 50% of the year's profits.

The corporation is required to give you a Schedule K-1 early each year, showing in detail the calculation of your share of the profits and the basis for allocation to you.

There might be taxes other than income taxes for which the corporation, or you, might be liable, but probably not. The income taxes are the big deal. When you cease to be a shareholder, you cease to participate in the income, and hence cease to have any personal liability for taxes on the income.

See a tax advisor or tax attorney with a copy of this answer, the demands being made on you, and the documents relating to your withdrawal from ownership.